B102.2 - Finance |
Generally speaking, Finance is all about money. Finance is not just for big corporations. Finance is very relevant to the smallest of businesses and in fact every individual who deals with money.
Everything you learn related to Small Business finance is applicable to your personal life. It is one of the most valuable topics to learn about because money is in fact energy in material form, and Finance represents the way in which that money is handled -- so in essence -- Finance is in fact about learning to manage energy.
For quick clarification, Accounting is the counting or tracking of money. Accounting is typically one component of Financial Management, so in that sense accounting has a child relationship to finance, and accounting is covered in a separate section.
Below is an outline for this page:
- Formal Definitions
- Formal Curriculum
- Important Questions for Understanding
- Discussion -- Your personal world as a mirror
- Discussion -- Credit Score
- Discussion -- Cashflow, Working Capital, Cash Reserves
- Discussion -- Bankers
Section 99 at the bottom is the Real World Stuff you need for operations.
1) Formal Definitions
Finance (noun)
Finance (verb)
Source: Google "define x"
- The management of large amounts of money, especially by governments or large companies
- Monetary support for an enterprise
- The monetary resources and affairs for a country, organization or person
Finance (verb)
- Providing funding for (a person or enterprise)
Source: Google "define x"
2) Formal Curriculum
In an Introduction to Finance course, topics often include:
If you look at the curriculum above, you will realize that the only item which might not immediately impact you as a Sole Practitioner is Corporate Capital Structure, but in fact it does if you need to setup a new company as even the smallest of S-Corps and LLC's imply a financial structure that is relevant.
- Financial Statements
- Financial Analysis
- The Time Value of Money (Future value, present value, and interest rates)
- Budgeting Techniques
- Risk and Return
- Corporate Capital Structures
- Taxes
If you look at the curriculum above, you will realize that the only item which might not immediately impact you as a Sole Practitioner is Corporate Capital Structure, but in fact it does if you need to setup a new company as even the smallest of S-Corps and LLC's imply a financial structure that is relevant.
3) Important Questions for Understanding
Below are questions you should seek the answers to as a Small Business person. Once you can dialogue on these with fluidity and personal experience, your base for growth can't be shaken.
Curriculum Related Questions
Curriculum Related Questions
- Financial Statements -- Do you know what financial statements are relevant to you? Do you know how to create them, interpret them and/or use them for your benefit? (hint: some of these are covered in more detail in the accounting section too).
- Financial Analysis -- Do you know what financial analysis might be relevant in small business? Can you do it yourself or do you need assistance?
- The Time Value of Money (Future value, present value, and interest rates) -- Do you understand what this is technically, and do you have an appreciation for it that is more subjective/intuitive?
- Budgeting Techniques -- Can you make a budget? Can you follow a budget?
- Risk and Return -- Do you understand the relationship between risk and return? Do you realize it is a model that can be used for all kinds of assessments including market manipulation? Do you know how to asses Risk? Do you know how to select someone else to assist you with risk assessment? Do you realize one bad financial move can wreck years or decades of financial achievement?
- Corporate Capital Structures -- This is kind of irrelevant for most Sole Practitioners. It does become relevant if you felt you wanted to setup an S-Corp or a C-Corporation, and that topic leads into Business Entity formations, but that is outside the scope of this dialogue
- Taxes -- Are you up to speed on the amounts you will owe for Federal Income Tax, Self-Employment Tax (aka Social Security), State Income Tax, State and Local Sales Tax, other Taxes and Insurance ? We include insurance here because most of it is the hidden tax. Do you know why we call insurance the hidden tax?
Credit Score
Working Capital, Cash Reserves, and Credit
- Do you know your credit score?
- Do you know who calculates credit scores, how that calculation process works (generally) and how you can increase your credit score?
- Do you know what adversely affects your credit score and how long that adverse affect lasts?
- Do you know the thresholds at which your credit score hurts you and benefits you?
- Do you know who the best credit councilors are? (it's not that obvious, but makes perfect sense after you realize it)
Working Capital, Cash Reserves, and Credit
- Do you know what cash reserves are, and do you know why they are needed?
- Do you have sufficient Capital to start and run your business?
- Do you have sufficient working capital/credit to operate on a monthly basis?
- Do you have enough cash and/or credit lines to protect yourself in an emergency?
- Do you realize that those that extend credit can turn from friend to foe almost instantly if they want to pursue nefarious "business" dealings?
Cash Flow
Banker and Banks
Financial Consulting Resources
Risk
- Do you understand what cash-flow management is?
- Do you understand how it differs from accounting?
- Do you understand the saying, "cash-flow is King"?
- Do you realize your business cash flow habits can only really mirror your personal habits?
Banker and Banks
- Do you understand that most corporate bankers are NOT really your friend, no matter how friendly the folks in the branch might be?
Financial Consulting Resources
- Do you know how to evaluate a good financial consulting resource?
- Do you know how to see thru a bad financial consulting resource?
Risk
- Do you know how to assess risk?
- Do you know how to select someone else to assist you with risk assessment?
- Do you realize one bad financial move can wreck years or decades of hard work?
4) Discussion - Your personal world as a Mirror
Sole Practitioners often times don't put much thought into the formalities of Finance because as the first definition implies, it is typically associated with "large amounts of money", "governments", and "large corporations". And while finance certainly becomes a much bigger deal as one scales, the fact of the matter is that all Businesses start with Finance.
The way you handle your personal finances is a good indicator of how you will handle your business finances.
If you can't or don't handle your personal finances in a responsible or knowledgeable manner, or if you have no experience handling credit, or if you haven't saved for a rainy day, chances of you handling your business finances well are slim.
- Do you have the money to buy the education you may want or need to start a business?
- Do you have the money to start a business?
- Do you have the ability to borrow the money for the education or the business?
- Do you have the money to sustain your business during startup?
The way you handle your personal finances is a good indicator of how you will handle your business finances.
- Do you have monthly cash reserves?
- Do you use a budget?
- Do you have long term cash reserves? Should you?
- Do you have open lines of credit? Is there room on them? Do you have access to more if needed?
- etc
If you can't or don't handle your personal finances in a responsible or knowledgeable manner, or if you have no experience handling credit, or if you haven't saved for a rainy day, chances of you handling your business finances well are slim.
5) Discussion - Credit Score
Below are gross generalities about credit scoring...
Bankers make more money off of people who handle their money poorly than they do off people who handle their money well, and bankers are NOT in the business of congratulating you on "A" credit, because they will in fact make less money on you for being responsible.
- There are three national companies that do credit scoring: Experion, Equifax and Transunion
- They all use different algorithms for calculating credit score.
- Credit scores run from approximately 300 to 850 (It's a strange scale, kind of like the SAT scale)
- Each company's scale is slightly different. We've never seen a score below the 400's.
- 650 and above is considered okay (think of it like having a "C" or above in a class)
- 700 or above is like having a "B"
- 750 or above is like having an "A".
- Ironically, there is NOT that much benefit of having anything above a "C" and there is very little difference between a "B" and an "A". To understand this, you have to think about this from a Bankers perspective with the Risk-Reward model in mind (higher the risk the higher the reward).
- During our Banking crash of 2008, one of the leading problems was credit ratings companies who graded companies and investments higher than they should have for the investors who were packaging investment products so they could sell average items at above average prices and above average items at top prices. Having watched our credit system for 20 years, there is now a similar situation going on with these credit bureaus. One has to work quite hard to keep a low credit score, and one can reverse a low credit score so easily, it can make someone who behaved very poorly in the recent past look like they are a lower risk than they really are. It appears the ratings agencies have likely been incentivized by bankers and others to alter the system for the benefit of the consumer credit industry, but this is just speculation based on non-scientific observations without sound research for support.
Bankers make more money off of people who handle their money poorly than they do off people who handle their money well, and bankers are NOT in the business of congratulating you on "A" credit, because they will in fact make less money on you for being responsible.
If you have a need to improve your credit score, here are some simple tips...
- The most adept people for helping folks correct their credit while explaining what is going on is in fact Mortgage Bankers, as they do it routinely for their clients as part of their sales process.
- To correct your credit, run your credit report online, identify issues you have corrected or can correct. Correct them. Create a form letter with the corrected info and mail it to the 3 major credit reporting bureaus. Increasing your credit score can be just that simple.
- There are credit correction services out there, and in general, all they do is what was just suggested regarding identification of issues, coaching and then writing 3 letters. If you are in a situation where negotiating down debt is desirable, they may come in far more handy.
- If you have good credit and you want to increase your credit score, one simple secret is to carry a balance of less than 30% of your available credit month to month (even when you don't need to). Paying a small amount in interest monthly is what increases your credit score... and yes... it is like buying a higher credit score.
6) Discussion -- Cashflow, Working Capital, Cash Reserves
Cash-Flow is King
- Cash flow management is the management and forecasting of inflows and outflows to be sure there is never a time in which you don't have liquid funds to pay your bills.
- Many people errantly believe that as long as they have a great product or as long as they have a great sales team or as long as they have awesome marketing, their business will be a success. In reality, the baseline for success for a business revolves around the ability to pay ones' bills monthly... and in that sense, one must have the Cash-flow coming in (and going out properly) to even stay on the playing field, and thus Cash-flow (management) is King to all business activities. Without a proper King, the Kingdom will fall.
- Do you realize that Cash-flow is the number one killer of businesses, not bad ideas. While this is generally a repeat of the the statement/paragraph above, it is reiterated here because it is just that relevant. Do an internet search on 'Cash-flow is King' or the relevance of cash-flow to business success for more details.
Working Capital and Cash Reserves...
- Your goal should be to have 6 months of Expenses liquid in your bank accounts at all times. With anything less than that and one major road bump can terminate your business. If 6 months seems like too big of a goal out of the gate, shoot for 3 months first.
- You should be using 20-30% of your available credit on a regular basis monthly. This gives you 3 months worth of carrying ability if needed for peaks and valleys.
6) Discussion - Credit
Do you know the Resources available to you for Credit?
- Unsecured Credit (Credit Cards)
- Home Equity Line of Credit (a credit card too...)
- Secured Credit (with a Home Equity Line of Credit being one example of this...)
- Credit Against Inventory, Sales, Etc
- Hard Money
- Bank Lending/Financing
- Stock and Equity Financing
- Debt Financing
7) Discussion - Bankers
Banking is a very personal game. In the olden days, having a personal banker at a local bank was key to success, as a trusted one was basically a partner in your business. Those days are long gone for the most part.
Never assume a banking relationship with a big bank is mutually beneficial. Always respect your banker like you might respect a tiger or lion and be ever present in each transaction. Big Bankers make big money on your mistakes and they count on you to make mistakes to earn profits in excess of what they can earn with the risk-reward model of banking.
Never assume a banking relationship with a big bank is mutually beneficial. Always respect your banker like you might respect a tiger or lion and be ever present in each transaction. Big Bankers make big money on your mistakes and they count on you to make mistakes to earn profits in excess of what they can earn with the risk-reward model of banking.
99) The Real World Setup for Operations
The following is a setup for finance/credit that's been used succesfully and shared with others who have used it with success...
Select a Banking Institution
Do all your banking with a single bank that has exceptional online portal. You want to be able to see all your checking accounts and credit cards on one screen. It is preferential to have all your personal accounts at the same bank and it is preferable to have all personal and business accounts view-able at the same time. Unfortunately, our recommendation is to use one of the larger banks due to their online capabilities. One of the contributors to this publishing caught Bank of America committing egregious fraud in a Mortgage Underwriting process and he didn't leave them as a personal and business customer because 1) He was aware that all major banks were in on manipulating the same game, they just weren't as blatant about it and 2) their online banking system is second to none. The idea of voting with my "money" as a customer is great, but this is one area that makes that tough. You want/need a bank that has exceptional commercial credit options with easy overdraft setups.
Select a Banking Institution
Do all your banking with a single bank that has exceptional online portal. You want to be able to see all your checking accounts and credit cards on one screen. It is preferential to have all your personal accounts at the same bank and it is preferable to have all personal and business accounts view-able at the same time. Unfortunately, our recommendation is to use one of the larger banks due to their online capabilities. One of the contributors to this publishing caught Bank of America committing egregious fraud in a Mortgage Underwriting process and he didn't leave them as a personal and business customer because 1) He was aware that all major banks were in on manipulating the same game, they just weren't as blatant about it and 2) their online banking system is second to none. The idea of voting with my "money" as a customer is great, but this is one area that makes that tough. You want/need a bank that has exceptional commercial credit options with easy overdraft setups.
Checking Accounts
Establish 2 checking accounts with your bank. We will refer to the first account as the "working account" and the second account as the "deposits" account. The deposits account is only needed if you take credit cards in reasonable volume. This two account system will greatly simplify your accounting if you take credit cards. The credit card purchases will sweep into the "deposits" account on a nightly basis and you will make a single transfer recorded as "sales" weekly or monthly into your "working account". Think of this "deposits account" like a cash drawer. You have the money, but it really isn't "accounted for" until you sweep it into the "working account" (just like your cash box sales aren't accounted for until they are deposited). If you are depositing sales checks weekly, you can just deposit those straight into the working account. If you are doing it more frequently, consider depositing those into your "deposits account" first too. Once you see this in action from a booking / account reconciliation perspective and from a cash flow management perspective where your primary tool is your banking console, the benefits will make sense.
You will only need checks for the "working account". Get checks that are wallet duplicate checks. Do NOT get over-sized checks nor any of the business check options. Repeat, get checks that are wallet duplicate checks only. Get several of the inexpensive check book covers for your checks.
If there are $10-$15/month expenses with these accounts, consider it a cost of doing business. If you are a serious business person, you have no business focusing on such small items for such important tools.
Establish 2 checking accounts with your bank. We will refer to the first account as the "working account" and the second account as the "deposits" account. The deposits account is only needed if you take credit cards in reasonable volume. This two account system will greatly simplify your accounting if you take credit cards. The credit card purchases will sweep into the "deposits" account on a nightly basis and you will make a single transfer recorded as "sales" weekly or monthly into your "working account". Think of this "deposits account" like a cash drawer. You have the money, but it really isn't "accounted for" until you sweep it into the "working account" (just like your cash box sales aren't accounted for until they are deposited). If you are depositing sales checks weekly, you can just deposit those straight into the working account. If you are doing it more frequently, consider depositing those into your "deposits account" first too. Once you see this in action from a booking / account reconciliation perspective and from a cash flow management perspective where your primary tool is your banking console, the benefits will make sense.
You will only need checks for the "working account". Get checks that are wallet duplicate checks. Do NOT get over-sized checks nor any of the business check options. Repeat, get checks that are wallet duplicate checks only. Get several of the inexpensive check book covers for your checks.
If there are $10-$15/month expenses with these accounts, consider it a cost of doing business. If you are a serious business person, you have no business focusing on such small items for such important tools.
Credit Cards
Establish Corporate Cards with the bank. This enables you to get additional cards for employees and others who spend money for you as needed. If you can not qualify right away, use a personal credit card exclusively for business if you can, and use two if you need to. If you can not get Corporate Cards for some reason, make cleaning up your credit and establishing a corporate account your first priority.
With Corporate Accounts, there is typically an account number that looks like a credit card number, but no credit card is issued for that number. That is the parent account number. The cards you are issued for yourself and others are tied to that parent account for statement purposes.
If there are $75-100 fees for these credit cards, you do NOT care. You need them. If the interest rates are 20% or more, you kind of don't care as you should not be carrying balances. Work to get what you can. These are tools of convenience if used properly.
Establish Corporate Cards with the bank. This enables you to get additional cards for employees and others who spend money for you as needed. If you can not qualify right away, use a personal credit card exclusively for business if you can, and use two if you need to. If you can not get Corporate Cards for some reason, make cleaning up your credit and establishing a corporate account your first priority.
With Corporate Accounts, there is typically an account number that looks like a credit card number, but no credit card is issued for that number. That is the parent account number. The cards you are issued for yourself and others are tied to that parent account for statement purposes.
If there are $75-100 fees for these credit cards, you do NOT care. You need them. If the interest rates are 20% or more, you kind of don't care as you should not be carrying balances. Work to get what you can. These are tools of convenience if used properly.
Auto-pay for Credit Cards
Setup auto-pay to pay the minimum amount on your credit card(s) from your working account. Setup payment to be made on the due date, but a few days prior is a good idea too. If something goes wrong with the auto pay, you will never be stuck paying fees.
Online Portal
Setup your online portal so you can view all your personal and business accounts at one time. This is critical for easy Cash Flow Management analysis.
Setup auto-pay to pay the minimum amount on your credit card(s) from your working account. Setup payment to be made on the due date, but a few days prior is a good idea too. If something goes wrong with the auto pay, you will never be stuck paying fees.
Online Portal
Setup your online portal so you can view all your personal and business accounts at one time. This is critical for easy Cash Flow Management analysis.
Online Bill Pay
Bill pay is a check writing system in which your money is removed from your account, the equivalent of a cashiers check is written for the company you want to pay (or a delayed transfer is setup) and the payments are made on a schedule. Some people love this others prefer to hand write checks. This is good for managing cash flow in that money is removed when allocated, so harder to get caught not realizing an outstanding check is still outstanding.
Bill pay is a great way to refund deposits for a vacation rental business, for example. It saves time writing a check, addressing an envelop and buying a stamp. For those purposes it is okay, but the checks arrive at the individuals homes in very non-descript envelops (no bank logos and no indication a check is inside). On several occasions, folks have discarded them as trash, so give individuals a heads up of what to look for (a non-descript envelop) to avoid headaches.
Bill pay is a check writing system in which your money is removed from your account, the equivalent of a cashiers check is written for the company you want to pay (or a delayed transfer is setup) and the payments are made on a schedule. Some people love this others prefer to hand write checks. This is good for managing cash flow in that money is removed when allocated, so harder to get caught not realizing an outstanding check is still outstanding.
Bill pay is a great way to refund deposits for a vacation rental business, for example. It saves time writing a check, addressing an envelop and buying a stamp. For those purposes it is okay, but the checks arrive at the individuals homes in very non-descript envelops (no bank logos and no indication a check is inside). On several occasions, folks have discarded them as trash, so give individuals a heads up of what to look for (a non-descript envelop) to avoid headaches.
Online Transfers
Transfers between business and personal accounts are "legal", you just need to carefully document what you are doing (owner draws or lending money to your business or paying for service to yourself, etc). In general, keep these transfers to a minimum of 1 or 2 a month if possible for simpler accounting.
Online transfers to other banks are permissible in Bank of America systems for $3 to 10 each. There are typically limits.
Online Transfers vs Online Bill Pay for Credit Card Balances
With Bank of America, one can "transfer" money from a checking accounts to a credit card or once can use bill pay. Always transfer it. It's just cleaner and removes an excess confusing step. The credit card services for most consumer banks are in fact most often treated like separate companies, so when you make a transfer from your checking account to pay off a credit card, you will see the money disappear from you checking account immediately, but it will not typically show up against your credit card account for 24-48 hours.
Transfers between business and personal accounts are "legal", you just need to carefully document what you are doing (owner draws or lending money to your business or paying for service to yourself, etc). In general, keep these transfers to a minimum of 1 or 2 a month if possible for simpler accounting.
Online transfers to other banks are permissible in Bank of America systems for $3 to 10 each. There are typically limits.
Online Transfers vs Online Bill Pay for Credit Card Balances
With Bank of America, one can "transfer" money from a checking accounts to a credit card or once can use bill pay. Always transfer it. It's just cleaner and removes an excess confusing step. The credit card services for most consumer banks are in fact most often treated like separate companies, so when you make a transfer from your checking account to pay off a credit card, you will see the money disappear from you checking account immediately, but it will not typically show up against your credit card account for 24-48 hours.
Check Deposits
For individual checks, the Bank Apps can't be beat.
For multiple checks, use night deposit box at your bank. Prepare a list of checks electronically in a spread sheet (so you have a record of it and so the math is correct), transfer totals to a blank deposit slip, put it all together in an envelope and drop it in the night deposit box.
Alternatively, you can spend your time standing at ATM machines if you'd like to do the multiple deposit thing, but not having a searchable record of checks by payee by deposit is not advisable.
For individual checks, the Bank Apps can't be beat.
For multiple checks, use night deposit box at your bank. Prepare a list of checks electronically in a spread sheet (so you have a record of it and so the math is correct), transfer totals to a blank deposit slip, put it all together in an envelope and drop it in the night deposit box.
Alternatively, you can spend your time standing at ATM machines if you'd like to do the multiple deposit thing, but not having a searchable record of checks by payee by deposit is not advisable.
Cash Advances on Credit Cards
You never want to be in a position where you need to take a cash advance on a credit card. The interest rates are crazy. Try to pretend that is never an option.
You never want to be in a position where you need to take a cash advance on a credit card. The interest rates are crazy. Try to pretend that is never an option.
Convenience Checks on Credit Cards
In general, there is typically some gnarly stuff in the fine print if you miss a deadline. I ignore these and pretend they are not an option.
In general, there is typically some gnarly stuff in the fine print if you miss a deadline. I ignore these and pretend they are not an option.
Paypal Account
A paypal account is basically an online checking account. To set one up, create a user account, login and attach a checking account to it. It will then require you to transfer a minimal amount (like $1) to confirm the checking account to get going. After that you can transfer money into that account to spend elsewhere or you can collect money from others for random things or business items. There is an option to select friends and family on transactions and those transactions are void of commissions, otherwise expect to pay about 3% as the recipient of money. You can actually accept credit cards via paypal without a merchant account agreement, just like with square. Some limits may apply.
A paypal account is basically an online checking account. To set one up, create a user account, login and attach a checking account to it. It will then require you to transfer a minimal amount (like $1) to confirm the checking account to get going. After that you can transfer money into that account to spend elsewhere or you can collect money from others for random things or business items. There is an option to select friends and family on transactions and those transactions are void of commissions, otherwise expect to pay about 3% as the recipient of money. You can actually accept credit cards via paypal without a merchant account agreement, just like with square. Some limits may apply.
Square (for credit card processing)
Setup a Square account (squareup.com) to accept credit cards. Use your smart phone for a processing device and you are in business in a simpler and easier way than with any merchant account setup. You can use an older smart phone or an inexpensive tablet for a dedicated processing machine. Square does now have a simple invoicing system built into their online portal. It is very simple to use. The entire account setup process takes under 5 minutes. You will need your checking account information handy. This is much easier to setup from a computer than all via mobile. This revolutionized the merchant processing world for small business people. A real boon.
Setup a Square account (squareup.com) to accept credit cards. Use your smart phone for a processing device and you are in business in a simpler and easier way than with any merchant account setup. You can use an older smart phone or an inexpensive tablet for a dedicated processing machine. Square does now have a simple invoicing system built into their online portal. It is very simple to use. The entire account setup process takes under 5 minutes. You will need your checking account information handy. This is much easier to setup from a computer than all via mobile. This revolutionized the merchant processing world for small business people. A real boon.
Merchant Account (for credit card processing)
In general, use Square or a comparable "no formal merchant account" service for credit card processing. If you have special needs for credit card processing, then reach out to those who issue merchant accounts. We may be listing some folks later for suggestions for merchant services.
In general, use Square or a comparable "no formal merchant account" service for credit card processing. If you have special needs for credit card processing, then reach out to those who issue merchant accounts. We may be listing some folks later for suggestions for merchant services.
Weekly/Monthly Cashflow Analysis
Weekly or monthly you will use your banking screen to do a quick assessment of your cash position. Having all accounts at one bank and on one screen, and having the ability to transfer funds transparently from one account to another as needed makes this process incredibly simple.
Weekly or monthly you will use your banking screen to do a quick assessment of your cash position. Having all accounts at one bank and on one screen, and having the ability to transfer funds transparently from one account to another as needed makes this process incredibly simple.
Accounting
Details related to Accounting and Bookkeeping will be covered under the Accounting section of FAMMMSOIT/bELS.
Details related to Accounting and Bookkeeping will be covered under the Accounting section of FAMMMSOIT/bELS.
Budgeting
Do your budgeting in with a spreadsheet (GSheets or Excel). Use estimates for your line items initially and then use accounting reports to confirm/modify as appropriate. Budget categories should be the same as your Tax Accounting and/or Cost Accounting categories, and you'll need to learn about those differences. There are Gsheet demos in another part of this resource.
Do your budgeting in with a spreadsheet (GSheets or Excel). Use estimates for your line items initially and then use accounting reports to confirm/modify as appropriate. Budget categories should be the same as your Tax Accounting and/or Cost Accounting categories, and you'll need to learn about those differences. There are Gsheet demos in another part of this resource.
Sales and Sales Tax Tracking
Do your Sales tracking and Sales Tax tracking in a spreadsheet if you don't have a web based POS that tracks all sales in a single place. There are Gsheet demos in another part of this resource.
Do your Sales tracking and Sales Tax tracking in a spreadsheet if you don't have a web based POS that tracks all sales in a single place. There are Gsheet demos in another part of this resource.